5 things you need to know about Shareholders' Agreements

1. What is a shareholders’ agreement?

A shareholders’ agreement is a contract between some or all of the shareholders of a company. Its purpose is to regulate matters of internal management by defining the scope of the relationship between the contracting parties.

2. What are the features of a shareholders’ agreement?

• Privacy – unlike the articles of association, which are lodged at Companies House, a shareholders’ agreement is not open to inspection by the public;
• Enforceability – unlike those contained in the articles of association, the provisions of a shareholders’ agreement can be enforced through certain contractual remedies. This can be particularly significant in relation to restrictive covenants; and
• Minimising disruption and disputes – an agreement can save a huge amount of expense and disruption if it sets out rules which should be followed in the event of a shareholder disagreement. Dispute can arise in a number of ways, for example petty squabbles, retirement and decisions on which agreement cannot be reached.

3. What does a shareholders’ agreement cover?

Matters commonly covered by a shareholders’ agreement are wide ranging and provisions can be tailored to suit the individual company. Examples of common provisions are: shareholder consent matters; restrictions on the transfer of shares to outsiders and third parties – existing shareholders can be given the right to buy shares which are to be issued or transferred; automatic transfer of shares (on certain events such as death or bankruptcy).

4. What other areas would a shareholders’ agreement typically cover?

Unless provision is made to the contrary, a shareholder is free to transfer their shares to whoever they wish. A shareholders’ agreement can set out offer round provisions which mean that the existing shareholders would be given the first right of refusal on any share transfer.

As the vast majority of decisions in a company are made at director level, a shareholders’ agreement can contain a list of matters which cannot happen without the prior written consent of an agreed number of shareholders. Having such consent matters, means that the shareholders (the ones with the financial interest!) keep a further degree of control over the running of the business.

At law, a deceased’s estate will hold the shares of the deceased shareholder. However, a shareholders’ agreement can provide that upon death the shares are automatically offered to the remaining shareholders to prevent the company having shareholders who may not have the necessary skills and experience for the business.

Additional bespoke clauses can be added too, depending on the circumstances. It may be appropriate to include automatic transfer provisions if someone leaves as a director and/or an employee. In addition, the company may also want to consider including appropriate restrictive covenants to prevent shareholders from competing with the company while they are a shareholder and for an agreed period thereafter.

Provision can also be included in a shareholders’ agreement which allows the majority shareholders to force the minority shareholders to sell their shares should an offer be received. As a purchaser typically wants 100% of the shares if they are acquiring the company this type of provision, known as a drag along, prevents the minority shareholders stopping a potential exit.

5. What happens if a new individual becomes a shareholder – will they automatically be bound by the shareholders’ agreement?

New shareholders in the company are automatically bound by the articles of association when they buy shares in the company. However, they are not automatically bound by the shareholders’ agreement. As such, should a new shareholder acquire shares they should formally agree to adhere to the provisions of the shareholders’ agreement in writing to ensure that the provisions apply to them.

Should you have a question or issue that you would like to discuss with the team, please feel free to get in touch emailing [email protected] or pick up the phone and call 0141 227 9607.